Regulation Relating to Definition of ``Plan Assets''Participant Contributions

SUMMARY: This document contains a final regulation revising the

definition of when certain monies which a participant pays to, or has

withheld by, an employer for contribution to an employee benefit plan

are ``plan assets'' for purposes of Title I of the Employee Retirement

Income Security Act of 1974 (ERISA) and the related prohibited

transaction provisions of the Internal Revenue Code (the Code). The

final regulation provides that participant contributions to employee

pension benefit plans become plan assets on the earliest date that they

can reasonably be segregated from the employer's general assets, but in

no event later than the 15th business day of the month following the

month in which the participant contributions are withheld or received

by the employer. The final regulation establishes a procedure by which

an employer that sponsors a pension plan may obtain an extension of

this maximum period for an additional 10 business days with respect to

participant contributions received or withheld in a single month. With

respect to employee welfare benefit plans only, the final regulation

leaves unchanged the current regulation, which provides that

participant contributions become plan assets as of the earliest date on

which they can reasonably be segregated but in no event later than 90

days from the date on which the participant contributions were received

or withheld by the employer. This rule provides guidance to employers

that sponsor contributory pension and welfare plans, including plans

complying with section 401(k) of the Code, as well as fiduciaries,

participants, and beneficiaries of such plans.

DATES: Effective date. This regulation is effective on February 3,

1997.

Applicability dates. The regulation also establishes a procedure by

which an employer may obtain a postponement of the application of the

new maximum period for pension plans for up to 90 additional days

beyond the effective date. For collectively bargained plans, the new

maximum period for pension plans does not apply until the later of

February 3, 1997 or the first day of the plan year that begins after

the last to expire of any applicable collective bargaining agreement in

effect on August 7, 1996. Pending the application of the new maximum

period for pension plans, plans are subject to the same maximum period

that applies to employee welfare benefit plans. Except as described

above with respect to the postponement procedure and collectively

bargained plans, the requirements of the regulation are applicable to

all plans on the effective date.

FOR FURTHER INFORMATION CONTACT: Rudy Nuissl, Office of Regulations and

Interpretations, Pension and Welfare Benefits Administration, U.S.

Department of Labor, Washington, DC (202) 219-7461; or William W.

Taylor, Plan Benefits Security Division, Office of the Solicitor, U.S.

Department of Labor, Washington, DC (202) 219-9141. These are not toll-

free numbers.

SUPPLEMENTARY INFORMATION: On December 20, 1995, the Department of

Labor (the Department) published a notice of proposed rulemaking in the

Federal Register (60 FR 66036) to revise a regulation at 29 CFR 2510.3-

102 which had been issued by the Department in 1988. The 1988

regulation provided that the assets of the plan include amounts (other

than union dues) that a participant or beneficiary pays to an employer,

or amounts that a participant has withheld from his or her wages by an

employer, for contribution to the plan as of the earliest date on which

such contributions can reasonably be segregated from the employer's

general assets, but in no event to exceed 90 days from the date on

which such amounts are received by the employer (in the case of amounts

that a participant or beneficiary pays to an employer) or 90 days from

the date on which such amounts would otherwise have been payable to the

participant in cash (in the case of amounts withheld by an employer

from a participant's wages).1 This final rule was based on a

record developed with respect to a proposed regulation published in

1979. 44 FR 50363 (August 28, 1979).

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\1\ The Department's view is that elective contributions to an

employee benefit plan, whether made pursuant to a salary reduction

agreement or otherwise, constitute amounts paid to or withheld by an

employer (i.e., participant contributions) within the scope of

Sec. 2510.3-102, without regard to the treatment of such

contributions under the Internal Revenue Code. See 53 FR 29660 (Aug.

8, 1988).

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In the December 20, 1995 notice, the Department proposed to change

the maximum period during which participant contributions to an

employee benefit plan may be treated as other than ``plan assets'' to

the same number of days as the period in which the employer is required

to deposit withheld income taxes and employment taxes under rules

promulgated by the Internal Revenue Service (IRS). The Department

solicited comments on the advisability of other measures that the

Department might consider to address the problem of delays in

transmitting participant contributions to plans. The Department

received more than 600 written comments in response to the proposal.

The Department held a public hearing on the proposal on February 22 and

23, 1996, in Washington DC, at which time 21 organizations provided

testimony.

The following discussion summarizes the Department's proposal and

the major issues raised by the commenters. It also explains the

Department's reasons for the modifications reflected in the final

regulation which is published with this document.

Discussion of the Final Regulation and Comments

1. The Proposed Regulation

In issuing the proposed rule the Department stated that it did not

propose to change the general rule embodied in the 1988 regulation,

which is that participant contributions become plan assets as of the

earliest date that they can reasonably be segregated from the general

assets of the employer. Instead, the Department's proposal emphasized

that the maximum time period was not a safe harbor, and proposed to

drastically reduce the maximum period after which participant

contributions would be considered plan assets. Under the 1988

regulation, this maximum period was 90 days after the contributions

were received by the employer or would otherwise have been payable to

the participants in cash. The Department proposed to change the maximum

period to the same number of days as the period within which the

employer is required to deposit withheld income taxes and employment

taxes under rules promulgated by the IRS.

The currently applicable IRS rules are codified at 26 CFR 31.6302-

1. As explained in the preamble to the December 20, 1995 notice of

proposed rulemaking, the IRS deposit rules generally require employers

who have

[[Page 41221]]

reported more than $50,000 of withheld income taxes and employment

taxes for a prior 12-month ``lookback'' period (defined as ``semi-

weekly depositors'') to make tax deposits to a Federal Reserve Bank or

authorized financial institution within a few days of withholding from

wages. Employers who have reported $50,000 or less of withheld income

taxes and employment taxes in the lookback period are defined as

``monthly depositors'' and must make such deposits on or before the

15th day of the month following the month in which the employees' wages

are paid. The Department specifically solicited comments on the

appropriateness of including in the final regulation the following two

special rules that supplement the general tax deposit rules in the IRS

regulation: (1) An employer who has accumulated on any day $100,000 in

withheld income taxes and employment taxes must deposit such taxes by

the next banking day; (2) an employer who accumulates less than a $500

tax liability during a calendar quarter is not required to make

deposits; the tax is paid with the filing of the tax return for the

quarter.

The Department recognized that some employers would perceive

difficulties in transferring participant contributions to an employee

benefit plan that they do not have in the deposit of federal employment

taxes. The Department solicited comments as to any specific burdens and

associated costs of this kind. The Department also requested comments

on the transition period needed for employers and service providers,

especially small businesses, to make changes in practices that would be

necessary to comply with the proposal if it was adopted.

Although the Department did not propose a maximum period applicable

to all employers based on a fixed period of days (such as 15 days), it

stated in the December 20, 1995 notice that it would consider such a

rule if adopting the time periods in the IRS tax deposit rules would

place an undue burden on plan sponsors. The Department solicited

comments on the advantages or disadvantages of using a fixed period of

days or some other formulation for a maximum period as well as to the

advisability of other measures to address the problem of delays in

transmitting participant contributions to plans.

2. Comments Addressed to the Maximum Period Described in the Proposed

Regulation

In response to the proposed regulation, the Department received

many comments 2 objecting to the use of the time periods that

apply for the deposit of withheld income taxes and employment taxes as

the maximum period for segregating participant contributions from the

employer's general assets. Employers of different sizes represented

that they would face difficulty and greatly increased costs in

attempting to meet the foreshortened time frames for segregation of

participant contributions set forth in the proposal. Service providers

to plans stated that it would not be feasible for them to administer a

rule that had a different maximum time period based on the size of the

employer. There was general agreement that the 90 day maximum period in

the 1988 regulation should be reduced, but many commenters regarded the

proposed regulation as formulating an overly restrictive maximum period

with the effect of imposing more stringent requirements on larger

employers even though, they contended, most of the cases in which

participant contributions were mishandled appear to have involved

smaller employers.

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\2\ References to ``comments'' and ``commenters'' includes both

written comment letters as well as prepared statements and oral

testimony at the public hearing.

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The commenters generally represented that, under current practices,

there are significant differences between the processing of withheld

federal income taxes and employment taxes prior to deposit, and the

processing of participant contributions to employee benefit plans. Tax

deposits are made without providing any data regarding the allocation

of the deposit amounts to individual employees until the end of the

year. By contrast, commenters stated that each time participant

contributions are transmitted to the plan, eligibility must be

confirmed, contributions must be allocated to the participants'

individual accounts, and the individual amounts must be reconciled to

the aggregate amount. Commenters also pointed out that employees who

participate in 401(k) plans may select differing amounts for

contribution, and may frequently change both these amounts and the

vehicles to which they are allocated.

Many commenters represented that the process of reconciling and

allocating participant contribution amounts is time consuming. Because

of the work involved in preparing for the transmission of participant

contributions to the plan, many commenters stated that they customarily

make such transmissions once a month, rather than after each pay

period. The commenters stated that requiring participant contributions

to be segregated as often as twice a week or more would force employers

to conduct these reconciliations and allocations with the same

frequency and thus would add substantially to the costs and burdens of

handling participant contributions.

Other commenters maintain that the proposal would simply not allow

sufficient time for the necessary review and correction of errors

before the transmission of the participant contributions to the plans.

These commenters pointed out that accuracy in calculating and

allocating participant contributions is very important. Although some

commenters acknowledged that mistakes can be corrected, including the

return of mistaken contributions, frequent mistakes can present

significant employee relations problems and undermine participant

confidence. According to numerous commenters, it is less burdensome and

costly to take additional time to assure the accuracy of participant

contributions before they are transmitted to the plan than it is to

find and correct mistakes afterwards. They pointed out that the more

frequently reconciliation and allocation computations are made, the

greater the opportunity for committing errors.

The commenters also represented that many brokerage houses, banks

and mutual funds are not willing to accept lump sum payments of

participant contributions from employers without at the same time

receiving instructions as to the allocation of such amounts to the

participants individual accounts. Some commenters also stated that

investment vehicles would not be willing to accept participant

contributions more frequently than once a month, even with appropriate

individual participant data, without increased charges. In addition,

some commenters stated that the proposal would present particular

problems for plans that have participant accounts valued on a daily

basis.

Smaller employers represented that they use outside service

providers to assist in plan management. For such employers, participant

contribution data is transmitted to the service provider and then back

to the employer as part of the reconciliation process before the

contributions are transmitted to the plan. It was also represented that

many smaller employers handle their own payroll and participant

contribution processing but lack sophisticated automation systems for

this work. It was represented that, because of these factors, many

smaller employers would

[[Page 41222]]

have difficulty meeting the outside limits set forth in the proposed

rule.

A few very large companies with sophisticated computer payroll

systems indicated that they could comply with the proposed regulation.

Many large companies, however, especially those with employees at

various locations and decentralized payroll systems, represented that

additional time is needed for processing payroll information from

different locations. One commenter pointed out that the deposit

schedules in the proposal would present difficulties for companies that

are members of control groups. Employers which have multiple payrolls

with varying cut-off dates stated that the proposal would seriously

increase their costs. For such employers, the proposed rule would

impede the more economical consolidation of contribution data from

different payrolls into large batches for processing. Instead, it would

require the processing of smaller amounts of data on an almost

continuous basis.

Employers who must comply with the ``next banking day'' rule for

deposits of withheld income taxes and employment taxes informed the

Department that the proposed rule would not be administratively

feasible because the transmission of participant contributions is far

more labor intensive and time consuming than the deposit of payroll

taxes. Moreover, some employers may become subject to this special

deposit rule only when they have unusually large payrolls, such as when

they pay large bonuses to employees.

Many commenters recognized that participant contributions could be

segregated quickly and frequently into a trust established to

temporarily hold participant contributions until they could be

reconciled in a more practical and less costly manner. Some of these

commenters, however, represented that the costs of establishing and

administering a separate trust would be considerable, outweighing any

additional earnings gained from using a trust, and would not be

justified by the additional benefits they might produce.3 Some

commenters provided calculations to support their claim that any

additional earnings derived from more frequent deposits of participant

contributions, either to individual accounts or to a holding trust,

would be more than offset by the increased attendant expenses.

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\3\ Some commenters assume that such earnings must be allocated

to the participants' individual accounts. This is not necessarily

so. A plan may provide that the earnings will be used to defray

reasonable plan expenses.

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Some commenters expressed concern that fiduciaries of participant

directed plans designed in accordance with the Department's regulations

at 29 CFR 2550.404c-1 would not be relieved of liability under ERISA

section 404(c) for management of money deposited in these separate

holding trusts. The commenters stated that requiring plan fiduciaries

to manage assets of such plans is contrary to the purpose of plans

designed to comply with section 404(c), which is to permit the

participants to exercise control over the assets allocated to their

individual accounts.

3. Comments Relating to Welfare Plans

A number of commenters recommended that the 1988 regulation remain

unchanged as applied to assets of employee welfare benefit plans.

Others proposed that participant contributions to welfare plans not be

treated as plan assets unless the contributions are deposited with a

trust. According to these commenters, welfare plan participants would

derive very little benefit from application of the proposed regulation

to their contributions because participant contributions to most

welfare plans, particularly health benefit plans, are not meant to be

invested, but are used to purchase coverage (such as medical or

disability coverage or life insurance) for a given period of time,

either directly from the employer in the self-insured context, or

through a state-regulated insurer. For such plans, the commenters

argued, there is no need to determine when or if participant

contributions become plan assets because the coverage is immediately

available to the participant and all the assets of the employer or of

the insurer are available for the payment of the benefits under the

plan. Several commenters also maintained that for many welfare plans,

especially health benefit plans, the participant contributions merely

reimburse the employer for expenditures on benefits or premiums that

the employer has already made.

The Department does not agree that the concept of participant

contributions becoming plan assets as soon as they can reasonably be

segregated from the employer's general assets has no relevance to

welfare plans. In the view of the Department, employees who agree to

deductions from their wages for contributions to a plan are entitled to

have the assurance that when the employer decides to purchase an

insurance policy or medical services for the plan, it is acting as a

fiduciary of the plan and is governed by the fiduciary standards of

ERISA in so doing. The fact that the participant contributions may be

used to repay an employer for advancing funds for the plan's expenses

does not, in the view of the Department, change the character of the

participant contributions. Moreover, if participant contributions to a

welfare plan are not promptly devoted to benefits and expenses, the

prudence and exclusive purpose requirements of ERISA may require that

the contributions be invested.

In addition, the Department, in issuing the proposed regulations,

did not contemplate a change in the general rule that participant

contributions to pension and welfare plans become plan assets as of the

earliest date on which they can reasonably be segregated from the

employer's general assets. Nor were comments solicited on alternatives

to the general rule. A change in the general rule is thus beyond the

scope of this rulemaking. The Department, however, does not believe

that the record is sufficient to support a change in the maximum time

period for welfare plans. As a result, the Department has determined

not to change the current maximum period of 90 days with respect to

welfare plans.

The Department has recognized that for cafeteria plans and certain

other types of welfare plans, the trust and certain reporting

requirements of ERISA present special burdens. As a result, the

Secretary issued a technical release, T.R. 92-01, which provides that

the Department will not assert a violation of the trust or certain

reporting requirements in any enforcement proceeding, or assess a civil

penalty for certain reporting violations involving such plans solely

because of a failure to hold participant contributions in trust. 57 FR

23272 (June 2, 1992); 58 FR 45359 (Aug. 27, 1993). Several commenters

sought assurance that the promulgation of this regulation does not

affect the continued validity of the technical release. The Department

wishes to provide such assurance. T.R. 92-01 is not affected by the

final regulation contained in this document, and remains in effect

until further notice.

COBRA payments were the subject of a number of comments.4 The

record indicates that participants and beneficiaries generally make

COBRA payments in the form of separate checks, usually made out to the

employer, and which arrive at different

[[Page 41223]]

times over the course of each month. Commenters stated that such

payments contain a high rate of errors and that the reconciliation

process regarding eligibility and amount is time consuming. One

commenter alleged that welfare plans that use third party service

providers to receive and aggregate participant contributions, including

COBRA payments, before they are applied to plan purposes need a minimum

of 45 days before the participant contributions should be treated as

plan assets. Because the Department has determined not to change the

existing regulation as it applies to welfare benefit plans, the

Department has determined not to create a special rule for COBRA

payments or for welfare plans that use a third party service provider

to receive participant contributions.

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\4\ COBRA payments are made for continuation of coverage under

certain group health plans pursuant to provisions of ERISA and the

Internal Revenue Code that were enacted as part of the Consolidated

Omnibus Budget Reconciliation Act of 1985 (COBRA).

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With regard to the continued application of T.R. 92-01, some

commenters questioned whether the technical release extended relief to

plans which receive COBRA contributions. It is the view of the

Department that the mere receipt of COBRA contributions or other after-

tax participant contributions (e.g., retiree contributions) by a

cafeteria plan would not by itself affect the availability of the

relief provided for cafeteria plans in the technical release.

Similarly, in the case of other contributory welfare plans, the mere

receipt of after-tax contributions by a plan would not affect the

availability of relief under the technical release provided that such

contributions are applied only to the payment of premiums in a manner

consistent with 29 CFR 2520.104-20(b)(2)(ii) or (iii) or 2520.104-

44(b)(1)(ii) or (iii).

4. The Final Regulation

After consideration of the comments and hearing testimony, the

Department has decided to modify the outside limit set forth in the

proposal. Under the final regulation, the general rule of the 1988

regulation remains unchanged for both pension and welfare benefit

plans: The assets of a plan include amounts paid by a participant or

withheld by an employer from a participant's wages as of the earliest

date on which such contributions can reasonably be segregated from the

employer's general assets. The final rule changes only the outer limit

beyond which participant contributions to employee pension benefit

plans become plan assets. The 1988 regulation had an outer limit of 90

days from the date of withholding from a participant's wages or from

the payment of the contribution by the participant to the employer. The

final regulation has an outer limit for pension benefit plans of the

15th business day of the month immediately following the month in which

the participant contributions are received by the employer (in the case

of amounts that a participant or beneficiary pays to an employer) or

the 15th business day of the month following the month in which such

amounts would otherwise have been payable to the participant in cash

(in the case of amounts withheld by an employer from a participant's

wages). Under the final rule the outside limit for welfare benefit

plans is the same time period as in the 1988 regulations, 90 days from

the date of the employer's withholding or receipt of the participant

contributions.

Substantially all of the commenters who addressed the issue

advocated a uniform maximum time period for all employers, large and

small. The maximum period for pension benefit plans contained in the

final regulation is slightly longer than the alternative by far the

most often proposed by commenters, which was 15 days after the end of

the month in which the participant contributions were received. Comment

letters received from a wide range of employers, third party

administrators, trustees and investment vehicles for plans indicated

that a 15 day rule would not impose undue costs or burdens, or

otherwise require them to change their current processes for handling

participant contributions. A comment recommended that the number of

days be measured in business days rather than calendar days. Because

the Department realizes that, for many employers, holidays and weekends

reduce the total number of days in which employers can perform the

functions necessary to segregate participant contributions from their

general assets in an orderly and cost efficient manner, the Department

has decided to adopt a maximum period measured by business days rather

than calendar days (i.e., excluding Saturdays, Sundays and national

legal holidays).

The final rule for pension benefit plans accommodates employers who

are unable reasonably to segregate participant contributions from their

general assets more frequently than in what appears to be a fairly

standard monthly processing cycle for participant contributions to

pension plans. The new rule thus should not increase the costs and

burdens for the great majority of employers who sponsor pension benefit

plans. In addition, as requested by most commenters, the rule would

apply to all such employers, regardless of size, and would simplify the

compliance monitoring function performed by service providers and the

Department.

At the same time, the final rule significantly reduces the maximum

period during which participant contributions to pension benefit plans

may be treated as other than plan assets (assuming that the participant

contributions could not reasonably be segregated from the employer's

general assets in a shorter time). Under the final rule, the maximum

period in which employers could commingle participant contributions to

pension benefit plans with their general assets would average about 35

days and would be no more than 52 days. Thus, in comparison to the 1988

regulation, the final rule enhances the security of employee retirement

benefits that are funded in whole or in part through participant

contributions.

The final rule does not change the requirement of the 1988 rule

that participant contributions become plan assets as of the earliest

date that they can reasonably be segregated from the employer's general

assets. Under the final rule this general requirement remains

applicable to both pension and welfare benefit plans. The final rule

also retains the emphasis of the proposed rule that the maximum period

does not operate as a safe harbor for either pension or welfare benefit

plans. As a result, for many plans, participant contributions will

become plan assets well in advance of the applicable maximum period.

Although the Department believes that the final regulation

establishes a maximum period that is sufficiently long to accommodate

the needs of employers that sponsor pension plans, employers who are

complying with the general rule, on occasion, may be unable to transmit

participant contributions to the plan within the maximum period. To

accommodate such a situation, the regulation includes a procedure for

an employer to extend the maximum period for an additional 10 business

days with respect to participant contributions for a single month.

Under this procedure, the employer must provide a true and accurate

written notice to the participants that the employer has elected to

take advantage of this extension period for the month. The notice must

also state the reasons why the employer cannot reasonably segregate the

participant contributions within the maximum time period for pension

plans, and state that the participant contributions in question have in

fact been transmitted to the plan and provide the date of such

transmission. The notice must be provided within 5 business days after

the end of the extension period. In addition, the employer must have

[[Page 41224]]

obtained, prior to the beginning of the extension period a performance

bond or irrevocable letter of credit in favor of the plan. Within 5

business days after the end of the extension period, a copy of the

notice provided to the participants must also be provided to the

Secretary along with a certification that the notice was distributed to

the participants and that the bond was obtained.5

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\5\ Such copy shall be addressed to: Participant Contribution

Regulation Extension Notification, Office of Enforcement, Pension

and Welfare Benefits Administration, U.S. Department of Labor, 200

Constitution Ave., NW., Washington, DC 20210.

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The amount of the bond or letter of credit must be not less than

the amount of the participant contributions received or withheld by the

employer during the previous month. The Department is concerned that in

some cases, the reasons prompting the employer to elect an extension

under this procedure may recur in the immediately following months and,

if so, might put the participant contributions at risk of loss. In

addition, because the extensions will not be subject to prior approval

by the Department, the Department has determined that the bond or

letter of credit must remain in effect for at least three months

following the month in which the extension period expires in order to

give the Department sufficient time to confirm that the participant

contributions were actually transmitted to the plan as represented in

the notice.

The regulation provides that an employer may not elect an extension

under this procedure more than twice in any plan year, unless the

employer pays to the plan an amount representing interest on the

participant contributions that were subject to all the extensions

within the plan year. The interest amount is to be measured by the

greater of (1) the amount that the participant contributions would

otherwise have earned from the date of withholding or receipt by the

employer until the date of transmission to the plan if the

contributions had been invested during such period in the investment

alternative available under the plan which had the highest rate of

return, or (2) the underpayment rate defined in section 6621(a)(2) of

the Internal Revenue Code applied to such period.

The Department emphasizes that the extension procedure is available

only to extend the maximum period and has no effect on the employer's

obligation to comply with the general rule that participant

contributions become plan assets as soon as they can reasonably be

segregated from the employer's general assets. The Department also

notes that this extension procedure applies only with respect to

participant contributions to pension plans; it does not apply with

respect to participant contributions to welfare plans.

5. Comments Recommending Alternative Approaches

a. Other Maximum Time Periods

Many commenters recommended other maximum time periods. One

commenter recommended a maximum period of the 25th day of the month

following the month in which the employer withheld or received the

participant contributions. A significant number recommended that the

maximum period be the 30th day of the month following the month in

which the employer withheld or received the participant contributions.

A few recommended a maximum period of 60 days after the date of

withholding or receipt by the employer. Others suggested a maximum

period of 45 days after the date of withholding or receipt. Several

commenters recommended maximum time periods of less than 15 days after

participant contributions were withheld or received by the employer.

Nearly all employers who make monthly transmissions of participant

contributions to plans and who provided information concerning their

current practices indicated that they transmit participant

contributions to plans within several days after the end of the month

in which the participant contributions are withheld or received.

The final rule, which provides a maximum period of 15 business days

after the end of the month in which the employer withheld or received

the participant contributions for pension plans, provides additional

time for the resolution of errors or for other unforeseen delays. In

light of the above, the Department believes that the final regulation

provides a sufficient maximum time for employers who are not able

reasonably to segregate participant contributions from their general

assets and transmit them to pension plans more often than once a month.

b. Extended Maximum Time Periods When There is a Change in Trustees

Some commenters recommended that the Department provide an extended

maximum period for situations where the employer changes recordkeepers

or plan trustees for section 401(k) plans. One recommended that the

maximum period in this situation should be the end of the third month

following withholding of the participant contributions. Another

commenter suggested that a rule allowing a maximum period ending on the

last day of the month following the month in which the contribution is

made would accommodate this situation. According to these commenters,

additional time is often needed to accomplish a smooth changeover of

recordkeeping and trustee functions from one party to another. The

commenters, however, did not provide any detailed information as to why

participant contributions could not be directed to one trust or the

other during this time period. The final regulation does not contain an

extended maximum period for special situations. The Department

recognizes that a change in trustees or funds for a section 401(k) plan

may require a period during which the outgoing fund or trustee cannot

accept contributions and the participants are unable to direct changes

in investment choices or contribution amounts. The Department, however,

believes participant contributions should be transmittable to the new

fund or trustee within the maximum time provided. In the Department's

view, a change in recordkeepers or other service providers to a plan

should not affect the maximum allowable period before participant

contributions become plan assets. In addition, the extension procedure

would be available to an employer who was complying with the general

rule but, due to a change of trustees, needed a brief extension of the

maximum period.

c. Administrative Waivers

Other commenters suggested that, in the event that the regulation

provided a maximum period of less than 30 days after the end of the

month in which the contribution is received, the Department should

provide a procedure for obtaining waivers of the maximum period. These

comments fall into two categories. The first category of comments

asserts that certain employers may not be able to segregate participant

contributions within the outside time limitation for reasons unique to

the company, but the employer is nonetheless transmitting participant

contributions to the plan as soon as they may reasonably be segregated

from the employer's general assets and should be able to petition the

Department for a waiver of the limitation. The second category of

comments asserts that employers who would ordinarily remit participant

contributions to the plan within the maximum period may sometimes miss

the limit because they are changing trustees, or because of other

factors, such as computer failures, erratic mail delivery, and employee

illness.

[[Page 41225]]

With respect to the first category of comments, the Department

believes that it has provided a sufficiently delayed effective date to

enable the small percentage of employers who cannot currently transmit

participant contributions to pension plans within 15 business days

after the end of the month in which the employer received the

contribution to change their practices to come into conformity with the

regulation without incurring undue expense. Nevertheless, as described

in the discussion of the effective date, the final regulation includes

a procedure by which an employer who is complying with the general rule

may obtain a postponement of the application of the maximum period for

pension plans for up to 90 additional days beyond the effective date.

This optional postponement will allow such employers additional time to

make necessary changes in their operations to be able to comply with

the final rule.

With respect to the second category of comments, the Department

believes that the maximum period established by the final regulation is

sufficiently long to accommodate most unanticipated events.6 With

respect to events beyond the control of the employer, the Department

notes that a predicate for a prohibited transaction under section

406(a) is that the fiduciary cause the plan to engage in the prohibited

transaction in question. Therefore, if the event giving rise to the

delay in segregating participant contributions is, in fact, beyond the

control of the employer, there would be no prohibited transaction under

section 406(a). Nevertheless, as explained more fully above, in the

discussion of the final regulation, the Department decided to provide a

procedure by which an employer who was complying with the general rule

may, on occasion, obtain a brief extension of the maximum time period

for pension plans.

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\6\ Where, for example, an employer mails a check to the plan,

the Department is of the view that the employer has segregated

participant contributions from plan assets on the day the check is

mailed to the plan, provided that the check clears the bank.

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d. Special Rule for Simplified Employee Pensions

Two commenters stated that the proposed rule was particularly

inappropriate as applied to simplified employee pensions that allow

participants to elect salary reduction contributions. Although such

plans are available only to employers with less than 26 employees, the

commenters maintained that many sponsors of SEPs would be semi-weekly

depositors. According to these comments, some SEPs allow participants

to designate their own custodians and the sponsor must make separate

payments to the custodian for each participant's account. The comments

state that the amount deferred for a given pay period is often very

small, and may well be less than the minimum deposit amount permitted

by the custodian. One of these commenters recommended that, for SEPs,

the time period should be 15 days from the earlier of (1) any pay

period in which the largest single accumulated participant contribution

exceeded $1,000, (2) the earliest date on which the total of all

accumulated participant contributions exceeded $5,000, or (3) two

months from the last contribution.

The Department has determined not to create a special rule for

SEPs. The great majority of commenters, including third party

fiduciaries, stated that it is important to have a single rule for all

employers. The final rule would permit sponsors of SEPs to remit

participant contributions as infrequently as once a month, if

necessary. This should allow the remission of amounts sufficiently

large to be accepted by custodians of SEPs.

e. Maintain the 90 day Maximum Time Period

Some commenters expressed the opinion that the 1988 regulation

should remain unchanged. Many of these commenters stated that the

abuses against which the proposed regulation is directed could be

better addressed by non-regulatory measures. Foremost among such

recommended measures was stricter enforcement efforts to identify and

correct violations. Given the Department's broad enforcement

responsibilities, the Department has concluded it would not be

practical to rely entirely on enforcement efforts to address the abuses

at issue here. The Department seeks, by reducing the maximum period

during which participant contributions may be treated as other than

plan assets, to reduce the amount of participant contributions that are

at risk because they have not yet been deposited in trust. Participant

contributions which have not been transmitted to a pension plan run two

types of risk: interest lost due to delay in depositing contributions,

and loss of the contributions themselves if the employer becomes

bankrupt. These risks may result in sizeable losses. Through July 1,

1996, the Department's enforcement actions against 401(k) plan sponsors

have retrieved $10.01 million in plan assets on behalf of participants

and beneficiaries. While the Department's non-regulatory efforts have

made a difference in the safeguarding of pension plans, the growth in

the number of plans with participant contributions (including 401(k)

plans) has made it infeasible, given the scarcity of Departmental

resources, to audit or advise every plan that warrants correction. In

these circumstances, the Department believes that publishing new

guidelines is the appropriate and efficient method of improving pension

safety.

Other commenters suggested that improving disclosure of information

to participants would obviate the need for a shorter maximum period by

allowing participants to better monitor their employer's handling of

participant contributions. The Department believes that the

establishment of meaningful and timely disclosure requirements in this

area would require legislative changes to ERISA. Furthermore, imposing

such requirements on employers or plans may impose a burden on them,

particularly with respect to small plans that do not use third party

administrators already offering this disclosure. The Department

considered a suggestion that it offer enhanced disclosure as an option

for smaller plans who could not reasonably segregate plan assets within

the maximum period in the final regulation, but concluded that such an

option may be costly for employers and plans and could be difficult to

administer.

As described above, however, the Department has determined not to

change the maximum 90 day period with respect to participant

contributions to welfare benefit plans.

6. Other Comments

a. Comments Relating to General Rule

Several commentators suggested that the existing rule that amounts

that a participant or beneficiary pays to a plan or has withheld from

his wages by an employer for contribution to a plan become plan assets

as of the earliest date on which such amounts can reasonably be

segregated from the employer's general assets be replaced by a fixed

time safe harbor. Others suggested that the existing rule be replaced

by a rule that such amounts become plan assets as of the earliest date

that it would be administratively feasible to transmit the assets to

the plan.

The rationale generally set forth by the commenters for proposing

the elimination of the rule that participant contributions become plan

assets as of the earliest date on which they can reasonably be

segregated from the employer's general assets is that it is difficult

to determine with exactitude as to when that date is and that the rule,

[[Page 41226]]

if it means that participant contributions become plan assets as soon

as they can be mechanically segregated from the employer's general

assets, is costly and burdensome. The commenters who advocated changing

the rule to state that participant contributions become plan assets as

of the earliest date that it would be administratively feasible to

transmit such contributions to the plan also appear to be reading the

existing rule as meaning that participant contributions become plan

assets as soon as they can be mechanically segregated from the

employer's general assets.

After consideration of these comments, the Department has

determined not to change the existing general rule. As indicated in the

preamble to the proposed regulation, the Department did not propose to

change the existing rule. The test remains as stated in the preamble to

the 1988 regulation:

The revised general rule relating to participant contributions

is intended to reflect a balancing of the costs of promptly

transmitting such contributions to the plan relative to the

protections provided to participants by such transfers. In

formulating the final regulation, the Department has attempted to

remain consistent with one of the key purposes of the trust

requirement of section 403(a) of ERISA--the segregation of plan

assets so as to prevent commingling of such assets with an

employer's own property.

The regulation is not intended, however, to allow employers to

use participant contributions for their own purposes. The Department

is concerned that participant contributions be paid promptly into

the plan so as to begin earning interest or other investment return

and to be available for the payment of benefits. Employers should

examine their current payroll procedures to ascertain whether they

are indeed transmitting participant contribution amounts at the

earliest reasonable time. (53 FR 17629, May 17, 1988)

b. Comments Relating to Fiduciary Duties

Several commenters urged that the Department indicate its position

with respect to the fiduciary duties of the institutional trustee which

receives contributions. They stated that, typically, the standard form

of trust agreement provides that the trustee is accountable only for

funds actually deposited and that, in their view, the trustee has no

obligation to collect contributions. One commenter acknowledged that

while the institutional trustee which receives contributions does not

have any primary duty to enforce payment of contributions, section

405(a)(3) of ERISA imposes a fiduciary duty to remedy the breaches of

other fiduciaries of which it has knowledge, but stated that a trustee

would not necessarily have sufficient information to determine when

there has been such a breach with respect to timely deposit of employee

contributions. Finally, one commenter who receives employee

contributions from many sponsors of 401(k) plans stated its belief that

``each service provider has a fiduciary responsibility to plan

participants to blow the whistle on the abusers,'' and stated that its

service agreement ``specifies that we will contact the Department of

Labor if contributions are not made at least once a month.''

Although it is the view of the Department that the plan sponsor

(usually the employer) is primarily responsible for assuring that

participant contributions are transmitted to the trustee in a timely

manner, section 405(a)(3) would impose a fiduciary duty on plan

trustees in certain circumstances.7 Delineating those

circumstances is beyond the scope of this rulemaking.

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\7\ For the Department's views of the obligations imposed on a

fiduciary by section 405(a)(3) in another situation, see 29 CFR

2509.75-5, Q&A FR-10.

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c. Partnerships

Two comments were received relating to when contributions by

partners to section 401(k) plans become plan assets. The letters

represent that, under 26 CFR 1.401(k)-1(a)(6)(ii), a partner's

compensation is deemed currently available on the last day of the

taxable year, and an individual partner must make an election by the

last day of the year. They ask when the monies, which otherwise would

be paid to a partner, but for the partner's election, become plan

assets, inasmuch as partners do not receive wages. In the view of the

Department, the monies which are to go to a section 401(k) plan by

virtue of a partner's election become plan assets at the earliest date

they can reasonably be segregated from the partnership's general assets

after those monies would otherwise have been distributed to the

partner, but no later than 15 business days after the month in which

those monies would, but for the election, have been distributed to the

partner.

d. Bankruptcy Laws

Two commenters recommended that the Department seek to have the

bankruptcy laws amended to provide a preference for participant

contributions commingled with the employer's general assets. One

commenter stated that such contributions should be elevated to the same

priority as earned payroll. Because such a change cannot be

accomplished through the Department's regulatory authority, these

recommendations are beyond the scope of this rulemaking.

e. Participant Loans

Clarification was requested from a commenter that the time periods

applicable to determining when participant contributions become plan

assets also apply to determining when repayments of participant loans

that are withheld or received by the employer become plan assets.

Another commenter stated that monies withheld for repayment of

participant loans should be afforded at least 90 days after withholding

because many plans provide for quarterly repayment of loans.

The question of when participant loan repayments become plan assets

is beyond the scope of this rulemaking. The notice of proposed

rulemaking did not solicit comments on this matter. The record is

insufficient for the Department to address this matter in the final

regulation. In the Department's view, however, employers should

promptly transmit participant loan repayments to plans. An employer's

failure to transmit loan payments within a reasonable time after

withholding or receiving them could subject the employer to liability

for violations of the same provisions of ERISA and criminal law that

are violated when an employer is delinquent in forwarding participant

contributions to plans.

f. Bonding

Several commenters suggested that many of the problems with which

the Department is concerned could be addressed by requiring that the

withheld wages and participant contributions be covered by ERISA's

bonding requirements prior to their transmittal to the plan. While this

suggestion may have some merit with respect to safeguarding participant

contributions from losses due to acts of fraud and dishonesty, it would

not protect against participant contribution losses where fraud or

dishonesty could not be shown. This is because the bond required under

section 412 of ERISA (29 U.S.C. 1112) protects the plan only against

acts of fraud or dishonesty. However, participant losses due to an

employer's failure to quickly segregate participant contributions arise

from numerous causes, of which provable acts of fraud or dishonesty are

a relatively minor factor. In addition, it would require an amendment

to the Department's existing bonding

[[Page 41227]]

regulations,8 which currently require bonding with respect to

participant contributions made by withholding from employees' salaries

only at the point in time when they are segregated from the employer's

general assets within the meaning of 29 CFR 2580.412-5. Such an

amendment is beyond the scope of this regulation.9

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\8\ See 29 CFR 2580.412.

\9\ T.R. 92-1 does not extend to the enforcement of the bonding

requirements of ERISA.

---------------------------------------------------------------------------

g. Maritime Employers

Two commenters stated that the proposed regulation would present

particularly difficult compliance problems for maritime employers.

According to these commenters, participant contributions for 401(k)

plans in this industry are commonly not transmitted to the plan until

the end of the voyage in which the participant earned the amount of the

contribution. Such voyages may last several months. The comments did

not focus on when wages are withheld for transmission to the plan. If

the wages are not withheld until the end of the voyage, the maximum

period within which the withheld wages must be transmitted would begin

at the end of the voyage. If the wages were withheld during the course

of the voyage, the Department does not perceive any reason why the

employer cannot remit such withheld wages to the plan within the same

maximum period as any other employer.

h. Multiemployer Plans

Several commenters argued that, because of the unique nature of

multiemployer plans, in that the plan trustees are independent of any

individual employer, the regulation should either entirely exempt

elective contributions to multiemployer plans from its provisions or

exempt such contributions from the maximum period provision. The

commenters noted, however, that the collective bargaining agreements

governing most multiemployer plans provide for transmittal of such

contributions from the employer to the plan within a fixed period,

typically between 10 and 20 days after the month in which such

contributions are made. The Department determined that the maximum time

period for pension plans in the final regulation was sufficient to

accommodate multiemployer plans and determined not to create a special

rule or exemption for multiemployer plans. At the same time, and as

more fully explained below in the discussion of the effective date, the

Department recognized that transmission of participant contributions

may be controlled by collective bargaining agreements and has addressed

the special nature of collectively bargained plans, including

multiemployer plans, in connection with the applicability of the new

maximum period for pension plans in the final regulation.

7. Dues Financed Plans

The final regulation leaves undisturbed the effect of the 1988

regulation on amounts paid to employee organizations as union dues. It

continues to be the Department's position that amounts paid as union

dues should not be characterized as participant contributions merely

because a portion of such dues might be used to provide benefits under

a welfare or pension plan sponsored by the employee organization.

8. Consequences of Treatment of Participant Contributions as Plan

Assets Before Transmission to the Plan Trustee

a. ERISA

Once participant contributions become plan assets, they become

subject to the trust requirements of ERISA section 403, 29 U.S.C. 1103.

Although ERISA section 403(b) contains a number of exceptions to the

trust requirement for certain types of assets, including assets which

consist of insurance contracts, and for certain types of plans,

participant contributions generally must be held in trust by one or

more trustees once they become plan assets. ERISA section 403(a), 29

U.S.C. 1103(a). Although the Secretary has authority, pursuant to ERISA

section 403(b)(4), to grant exemptions for welfare plans, including

health plans, from the trust requirements, this exemptive authority

does not extend to most pension benefit plans. As noted above, the

Secretary has issued a technical release, T.R. 92-01, which provides

that, with respect to certain welfare plans (e.g., cafeteria plans),

the Department will not assert a violation of the trust or certain

reporting requirements in any enforcement proceeding, or assess a civil

penalty for certain reporting violations, involving such plans solely

because of a failure to hold participant contributions in trust. 57 FR

23272 (June 2, 1992), 58 FR 45359 (Aug. 27, 1993). As a result, except

for plans which come within T.R. 92-01, an employer's failure to

transmit participant contributions to a plan trustee or investment

manager by the applicable period described in the final regulation may

subject the employer to liability under ERISA for failure to hold plan

assets in trust.

In addition, ERISA's fiduciary responsibility provisions apply to

the management of plan assets. An employer who retains plan assets

commingled with its general assets would be exercising ``authority or

control respecting the management or disposition of [plan] assets'' and

would be a fiduciary with respect to those assets pursuant to ERISA

section 3(21)(A)(i). Among other things, ERISA's fiduciary

responsibility provisions make clear that the assets of a plan may not

inure to the benefit of any employer and shall be held for the

exclusive purpose of providing benefits to participants in the plan and

their beneficiaries, and defraying reasonable expenses of administering

the plan. ERISA sections 403-404, 29 U.S.C. 1103-1104. Fiduciaries who

violate these provisions are personally liable to the plan to, among

other things, make good losses resulting from such violations and to

restore to the plan any profits of such fiduciary which have been

gained through the use of plan assets. ERISA section 409(a), 29 U.S.C.

1109(a).

ERISA's fiduciary responsibility provisions also prohibit certain

transactions involving plan assets. ERISA sections 406-407, 29 U.S.C.

1106-1107. In particular, ERISA section 406(a)(1)(D), 29 U.S.C.

1106(a)(1)(D), provides that a plan fiduciary shall not cause the plan

to engage in a transaction if he knows or should know that such

transaction constitutes a direct or indirect transfer to, or use by, or

for the benefit of a party in interest of any assets of the plan. The

employer of employees covered by the plan is a party in interest with

respect to the plan. ERISA section 3(14)(C), 29 U.S.C. 1002(14)(C).

Violations of ERISA's prohibited transaction provisions subject the

fiduciaries and parties in interest to liability for the plan's losses

and other relief. In the case of pension plans qualified under the

Code, the parties in interest (referred to as disqualified persons) are

subject to excise taxes under IRC section 4975. In the case of other

employee benefit plans, particularly welfare plans, the parties in

interest are subject to civil penalties under ERISA section 502(i), 29

U.S.C. 1132(i).

b. Criminal Law

As was noted in the preamble to the final regulation published in

1988, the Department of Justice takes the position that, under 18

U.S.C. 664, the embezzlement, conversion, abstraction, or stealing of

``any of the moneys, funds, securities, premiums, credits, property, or

other assets of any employee welfare

[[Page 41228]]

benefit plan or employee pension benefit plan, or any fund connected

therewith'' is a criminal offense, and that under such language,

criminal prosecution may go forward in situations in which the

participant contribution is not a plan asset for purposes of title I of

ERISA. As with the 1988 regulation, the final regulation defines when

participant contributions become ``plan assets'' only for the purposes

of title I of ERISA and the related prohibited transaction excise tax

provisions of the Internal Revenue Code. The Department reiterates that

this regulation may not be relied upon to bar criminal prosecutions

pursuant to 18 U.S.C. 664.

Similarly, State criminal laws may apply when an employer converts

participant contributions to the plan to the employer's own use.

Although the provisions of ERISA generally supersede State laws that

relate to employee benefit plans covered by title I of ERISA, generally

applicable State criminal laws are not preempted. ERISA section

514(b)(4), 29 U.S.C. 1144(b)(4). This regulation may not be relied upon

to bar criminal prosecutions under such generally applicable State

laws.

9. Effective Date of the Final Regulation

The effective date of this regulation is February 3, 1997. The

Department received relatively few comments addressing the

appropriateness of the proposed delayed effective date of 60 days after

the adoption of the final regulation, although the Department

specifically requested comments on this matter. Of those comments

received, the bulk of the comments addressing the effective date

recommended a one year delay if the proposed regulation was adopted

without significant change as a final rule, although several

organizations serving 401(k) plans indicated that a 180-day period

would not be inappropriate. However, most of the comments and hearing

testimony indicated that there would be little or no difficulty for the

vast majority of employers to meet the maximum period adopted in the

final rule for participant contributions to 401(k) plans. Some

commenters stated that while only a small percentage of employers would

have difficulty meeting the maximum period adopted in the final rule,

they would need a full year to change their processing systems.

The Department believes that the effective date for the regulation

has been sufficiently delayed to accommodate the needs of those

employers who will need to make significant changes in their payroll or

other systems in order to comply with the final regulation.

Nevertheless, the Department has determined to provide a procedure to

allow employers who are complying with the 1988 regulation to obtain up

to an additional 90 days postponement of the application of the new

maximum period for pension plans. Under this procedure, prior to the

effective date of the regulation, an employer must provide a true and

accurate written notice to the participants that the employer has

elected to postpone the application of the new maximum period for

pension plans, and providing the date that the postponement will

expire. The notice must also describe the reasons why the employer

cannot reasonably segregate the participant contributions within the

maximum time period for pension plans.

At the same time, the employer must obtain a performance bond or

irrevocable letter of credit in favor of the plan in an amount not less

than the total participant contributions withheld or received by the

employer during the previous three months. The bond or letter of credit

must be guaranteed by a government supervised bank or similar

institution. The Department is concerned that in some cases, the

reasons prompting the employer to elect a postponement under this

procedure may recur in the immediately following months and, if so,

might put the participant contributions at risk of loss. Because the

postponements will not be subject to prior approval by the Department,

the Department has also determined that the bond or letter of credit

must remain in effect for at least three months following the month in

which the postponement expires. A copy of the notice provided to the

participants must also be provided to the Secretary along with a

certification that the notice was distributed to the participants and

that the bond was obtained.10

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\10\ Such copy shall be addressed to: Participant Contribution

Regulation Extension Notification, Office of Enforcement, Pension

and Welfare Benefits Administration, U.S. Department of Labor, 200

Constitution Ave., N.W., Washington, DC 20210.

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Finally, for each month in which the postponement is in effect, the

employer must provide a true and accurate notice to the participants

stating the date on which participant contributions received or

withheld by the employer during that month were transmitted to the

plan. This notice must be distributed so as to reach the participants

within 10 days after the transmission. While the postponement is in

effect with respect to a particular plan, the participant contributions

to the plan will be subject to the same maximum period under the final

regulation that applies to employee welfare benefit plans.

Many commenters representing organized labor and employer

organizations pointed out that a rule requiring a change in a provision

governed by a collectively bargained plan may require renegotiation of

the collective bargaining agreement. These commenters also noted that

the drafters of ERISA recognized the special needs of collectively

bargained plans by providing special effective dates for collectively

bargained plans with respect to ERISA's participation, vesting and

funding provisions.11 They asked that the Department provide a

special postponement of the application of the maximum period for

collectively bargained plans. The Department believes that the comments

have merit and has provided for a postponement of the application to

collectively bargained plans of the new maximum period for pension

plans. Under the final regulation, the maximum period for pension plans

does not apply to collectively bargained plans until the later of (1)

the effective date or (2) the first day of the plan year that begins

after the expiration of the last to expire of any applicable bargaining

agreement in effect when the final regulation is issued. During this

period of postponement of applicability, the maximum period for welfare

plans in the final regulation will apply to collectively bargained

plans.

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\11\ See ERISA sections 211(c)(1) and 308(c)(1), (29 U.S.C. sec.

1061(c)(1) and 1086(c)(1)).

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Economic Analysis Conducted in Accordance With Executive Order 12866

and OMB Guidelines

Under Executive Order 12866 (58 FR 51735, Oct. 4, 1993), the

Department must determine whether the regulatory action is

``significant'' and therefore subject to review by the Office of

Management and Budget (OMB) and the requirements of the Executive

Order. Under section 3(f), the order defines a ``significant regulatory

action'' as an action that is likely to result in, among other things,

a rule raising novel policy issues arising out of the President's

priorities. Pursuant to the terms of the Executive Order, the

Department has determined that this regulatory action is a

``significant regulatory action'' as that term is used in Executive

Order 12866 because the action would raise novel policy issues arising

out of the President's priorities. Thus, the Department believes this

notice is ``significant,'' and subject to OMB review on that basis.

[[Page 41229]]

Costs

In connection with the publication of the proposed regulation the

Department solicited comments on potential economic effects of the

proposed rule in the context of Executive Order 12866, and any evidence

with respect to whether or not the proposed rule might be

``economically significant.'' The Department received many comments

regarding the additional costs and burdens that would have attended the

proposed regulation. Some commenters asserted that there would be

increased costs but did not provide data and information to explain

their assertions. The Department assumed that the information provided

in the record by those who did set forth data is reflective of the

additional costs which others would incur.

The Department estimated compliance costs of the plan asset

regulation set forth in this notice by utilizing information placed in

the record and Departmental data on industry practices.12 Costs

are separated into initial costs and ongoing costs.13 Initial

costs represent up-front expenditures for plan revisions,

reprogramming, and other one-time costs; these costs were annualized

over a conservative estimate of the ``life'' of the regulation, 10

years, in order to show such costs on an annual basis. Ongoing

expenditures incurred annually include additional audits for those

plans which need to create supplemental trust accounts, and the cost of

performing administrative tasks more frequently. Total annualized

initial costs and ongoing costs were aggregated to estimate total

annual costs.

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\12\ For the purposes of this analysis the Department referred

to data collected from the Form 5500, the annual return/report filed

by pension and welfare benefit plans. In addition, the analysis also

makes use of results of surveys on participant contribution plans

conducted by William M. Mercer, Incorporated, the Profit Sharing

Council of America, and Bankers Trust Company contained in the

record.

\13\ Costs are estimated based on information submitted to the

record both in the form of comment letters and testimony gathered at

the public hearing held on February 22 and 23, 1996.

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The plan asset regulation as originally promulgated in 1988

provides that participant contributions become plan assets as soon as

they may reasonably be segregated from the employer's assets. The

regulation is now being modified to shorten the maximum length of time

employers would have to treat participant contributions to pension

plans as other than plan assets under Title I of ERISA from 90 days

after these contributions were withheld or submitted, to 15 business

days after the end of the month in which the contributions were

withheld or submitted. Therefore, the costs of this regulatory action

are limited to the costs associated with bringing into compliance those

employers that are not remitting participant contributions to pension

plans within 15 business days after the close of the month.14

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\14\ The final rule does not change the requirement of the 1988

regulation that participant contributions become plan assets as of

the earliest date that they can reasonably be segregated from the

employer's general assets. The economic effects of these provisions

were accounted for in the issuance of the 1988 regulation.

Nevertheless, in estimating the economic effects of this regulation,

the Department has included the costs to plans which should have

been in compliance with the regulation as originally stated, as well

as with this revised regulation, but are not currently in compliance

because their administrators may have misunderstood the requirements

of the regulation as published in 1988.

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Compliance costs were estimated using information from commenters

on current practices and analysis of Form 5500 annual report data to

develop an estimate of the number of plans out of compliance with the

revised regulation. The present value (using a 7 percent real discount

rate) of the cost of compliance expressed in constant 1995 dollars

ranges from $17 million for 1996 costs to $9 million for 2005 costs,

totalling $107 million over the 1996-2005 period, and with a value

expressed as a constant annuity of $15 million per year over ten years.

Comments and survey data in the record supplied information on how

different sponsors would have different burdens associated with coming

into compliance, reflecting different payroll practices. Many witnesses

testified that they would incur no additional burden if the standard

was revised to require deposit by the fifteenth day after the previous

month's end. Some testified that they would have to change their

payroll practices to come into compliance; others determined that they

would have to redesign their payroll systems, or make use of a short-

term interest bearing trust. Comments and testimony were received

regarding financial institutions' practices, including fee structures;

information on compliance rates was taken from Form 5500 data, as

verified by survey data supplied in the record.15

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\15\ The annual cost estimate is based on commenters' estimates

of $6,000-$10,000 per plan per year for those that will establish

and maintain a trust for holding participant contributions short

term, $4,000-$6,000 per plan that will modify its participant

contribution management systems to comply with the revised

regulation (a first year only cost), and $600 per plan per year for

those that will be required to increase the number of deposits of

participant contributions to come into compliance. Some plans that

already deposit on a monthly basis will have to accelerate their

deposit schedules to comply with the 15 business day rule, but will

not have to pay for additional transactions. The sources used were

comment letters or testimony from Bankers Trust Company, National

Fuel Gas Company, American Society of Pension Actuaries, Profit

Sharing Council of America, Louis Kravitz, Berry Petroleum, and

Southern Champion Tray Company.

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Data analysis indicated that approximately 15,000 (in 1996) to

27,000 (in 2005) contributory pension plans would need to take steps to

come into compliance with the new provisions on participant

contributions. Of an estimated 239,000 16 pension plans which

receive participant contributions, approximately 94 17 percent

already deposit participant contributions within 15 business days after

the end of the month in which contributions were withheld or paid.

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\16\ Form 5500 data from 1992 (the most recent year for which

complete data is available) establishes that there are approximately

172,000 contributory pension plans subject to this regulation. Data

for 1989-1992 and preliminary data for 1993 show an average annual

increase of 22,000 in the number of contributory plans; assuming a

continuation of this rate of growth yields an estimate of 239,000

contributory plans subject to this regulation in 1995. Linear

extrapolation of this rate of growth yields an estimate of 461,000

plans in 2005.

\17\ This estimate is based on an analysis of Form 5500 data

utilizing 27,654 Form 5500 returns submitted for the 1992 plan year

by contributory plans, which showed 5% of large plans out of

compliance. Compliance rates of small plans were based on an

analysis of the behavior of the smallest Form 5500 filers; it is

estimated that 6% of small plans are out of compliance with the

revised regulation. This analysis represents the higher end of the

range of noncompliance rates based on survey data submitted by

commentators, none of which had a sample size of more than 317,

indicating a range of 2.5 to 8 percent of respondents are not in

compliance with contribution date limits in this regulation.

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In addition to the annual costs quantified above, other

unquantified costs may be recognized by employers, plans and

participants. For example, certain employers or plans may be unable to

accommodate the changes required by this revised regulation, and

consequently may conceivably offer a different type of pension plan,

reduce the employer's contribution to the plan, or cease to offer any

plan. However, the marginal cost of complying with the final regulation

has not been conclusively shown to have a measurable effect on rates at

which employers establish or terminate plans.

Benefits

Wages which are withheld for contribution to a plan are regarded by

the Department as the property of the participant from the time when

they would otherwise be payable to the participant directly. Delays in

the transmittal of these funds into a trust result in lost earnings to

the participant. PWBA estimates that $82 million will be gained in 1997

by participants and beneficiaries through the increased

[[Page 41230]]

earnings by having their contributions placed in trust at an

accelerated rate.18 The present value (using a 7 percent real

discount rate) of the increased earnings on participant contributions

expressed in constant 1995 dollars ranges from $76 million in 1997 to

$69 million in 2005 totalling $661 million over the 1996-2005 period,

and with a 10-year annuitized value of $94 million.19 This

estimate of these savings to participants, which are a result of

earlier segregation, include what is effectively a transfer from

employers, some of whom are in full compliance with the 1988 regulation

and act properly under their fiduciary responsibilities.

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\18\ This figure was reached by multiplying the additional

number of days funds will be in trust by the portion of the

estimated $63.7 billion (in 1997) in annual participant

contributions that would be deposited earlier by an annual rate of

return. A 2.1 percent annual real rate of return was used for

contributions deposited by those large plans which place funds in

short-term interest bearing trusts. A 10.1 percent real rate of

return was used for contributions deposited by the remainder of the

large plans and the small plans, representing an estimate of the

rate of return of 401(k) funds held in trust.

\19\ Although the Department expects plan sponsors to incur

costs in 1996 in anticipation of the final regulation's effective

date in 1997, the Department has assumed that no savings to

participants will accrue in 1996.

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In addition, PWBA believes that the revised regulation will reduce

the likelihood that some participant contributions will be lost in

bankruptcy proceedings by being placed in trust sooner, which will put

these contributions out of reach of the sponsor's creditors,20

with an estimated annual savings, stated as a 10-year annuitized value,

to participants and beneficiaries of $4 million. Plans will receive

additional saving to participants through the reduced likelihood of

litigation (both from the Department and from private sources) due to

the shortened maximum time limit. Many other savings to participants

associated with the revised regulation, such as reduced anxiety among

participants, improved goodwill of employees toward the plan sponsors,

and increased pension savings rates, have not been quantified.

---------------------------------------------------------------------------

\20\ Several commenters recommended that the Bankruptcy Code be

amended to exclude participant contributions from the bankrupt

employer's estate. Such an amendment would require legislation and

is beyond the scope of this regulation.

---------------------------------------------------------------------------

Based on information submitted to the record and the Department's

data, the present value (using a 7 percent real discount rate) of the

quantified benefits expressed in constant 1995 dollars ranges from $79

million in 1997 to $71 million in 2005, totalling $686 million over the

1996-2005 period, and with a 10-year annuitized value of $98 million.

The present value (using a 7 percent real discount rate) of the net

savings to participants expressed in constant 1995 dollars ranges from

$69 million in 1997 to $62 million in 2005, totalling $579 million over

the 1996-2005 period, and with a 10-year annuitized value of $83

million.21 This projection of the net savings to participants

includes what is effectively a transfer from employers some of whom are

in full compliance with the 1988 regulation and act properly under

their fiduciary responsibilities.

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\21\ The costs and savings to participants resulting in the use

of the postponement of applicability and extension procedures are

not included here. It is expected that the incidence of utilization

of these procedures will be so minimal as to have no measurable or

material effect on aggregate costs and benefits.

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Non-Regulatory Alternatives

The Department examined non-regulatory approaches for promoting the

prompt deposit of participant contributions into trust, including (1)

increased enforcement efforts by the Department, (2) issuance of non-

regulatory guidance, (3) educating participants on their rights, and

(4) seeking legislative guaranty of the protection of participant

contributions, as is done by the Pension Benefit Guaranty Corporation

for defined benefit plan assets. The increased enforcement approach

advocated by a number of comments is more fully addressed above in the

discussion of such comments.

Using its non-regulatory authority, the Department recently

announced a voluntary compliance program (61 FR 9203, March 7, 1996)

and a complementary class exemption (61 FR 9199, March 7, 1996) to

encourage plan sponsors who are delinquent in submitting participant

contributions to make their plans whole. This initiative, known as the

Pension Payback Program, is targeted at persons who failed to transfer

participant contributions to pension plans within the timeframes

mandated by regulation. Those who comply with this program will avoid

ERISA civil actions initiated by the Department, the assessment of

civil penalties under ERISA section 502(l), and related Federal

criminal prosecutions. The Department has received the cooperation of

the Department of Justice and the IRS in creating this program.

The Department has undertaken both an enforcement initiative and a

pension education campaign. One of the results of these two initiatives

was the demonstration of the need for a modified plan asset regulation.

An improved plan asset regulation will reduce the significant risk to

the pension assets of American workers caused by certain employers'

failure to modify their performance of their own accord. While most

plan sponsors have used technological improvements to accelerate the

date upon which participant contributions are placed in trust, the

failure of some plan sponsors to adopt improved industry procedures in

the years since the promulgation of the original plan asset regulation

has resulted in reduced retirement savings or actual losses for their

employees.22 While some elements of the 401(k) industry

voluntarily police employer transmittal of participant contributions

23, this appears to be rare, and thus fails to provide adequate

protection for employees' retirement contributions. Therefore, the

Department has determined that revision of the 1988 regulation is

necessary to provide greater protection against loss of pension income.

---------------------------------------------------------------------------

\22\ This is demonstrated by the interim results of the

enforcement initiative: over $10.01 million has been recovered for

contributory pension plans and their participants.

\23\ For example, a prominent third party administrator states

in its contract that it will notify the Department of Labor's

enforcement personnel should participant contributions become

overdue.

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Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., requires each

Federal agency to perform a Regulatory Flexibility Analysis for all

rules that are likely to have a significant economic impact on a

substantial number of small entities. Small entities include small

businesses, organizations, and governmental jurisdictions; under ERISA,

a ``small plan'' is one with less than 100 participants. ERISA section

104(a)(2), 29 U.S.C. 1024 (a)(2).

This notice describes the economic impact that the changes to the

existing regulation on participant contributions will have on small

entities. A summary of the analysis for this finding follows; these

points are explained in greater detail above:

(1) The Department is promulgating this regulation because it

believes that modifying the regulatory guidance in this area is

necessary to better protect the security of participant contributions

to pension benefit plans. Reducing the maximum period during which

participant contributions may be treated as other than plan assets is

expected to reduce the amount of plan contributions that are at risk

because they have not yet been deposited in trust. This regulation

preserves the existing rule that

[[Page 41231]]

participant contributions become plan assets as soon as they can

reasonably be segregated from the plan sponsor's general assets. Under

the 1998 regulation, this maximum period of time is 90 days from the

date of withholding from a participant's wages or from the payment of

the contribution by the participant to the employer; under the revised

regulation, this date is the 15th business day of the month following

the month in which the contribution would have been payable to the

participant. The revised regulation provides that the maximum time

period applicable for pension plans may be extended upon meeting

certain conditions specified in the regulation. The rule has not been

changed for welfare benefit plans.

(2) The proposed regulation requested comments on the initial

regulatory flexibility analysis and from small entities regarding what,

if any, special problems they anticipate they may encounter if the

proposal were to be adopted, and what changes, if any, could be made to

minimize these problems. In excess of half of the comments received

were received from small entities, their representatives, or businesses

that provide employee benefit services to small employers. Comments

received included concern about the increased administrative costs

associated with the need for an increased number of transactions, that

employers would respond to the increased costs by avoiding establishing

or terminating plans, and that costs would be passed on to employees.

Commenters also expressed concern that inaccuracies in the

reconciliation of accounts could be introduced by the number of

transactions and short time provided to contribute in the proposed

regulation. Two-thirds of the comments received from small businesses,

third party administrators, or their representatives recommended that

contributions to pension plans be made by the 15th day of the month

following the month of withholding. Some commenters recommended other

time periods, such as 30 to 60 days from the day of withholding, or the

last day of the month following the month of withholding. It was also

suggested that Department pursue a course of increased enforcement

rather than alter the regulation. A few commenters suggested that the

effective date be delayed, in some instances up to a year. Five

commenters suggested that a waiver or exemption procedure be

established. Most of the commenters did not distinguish between maximum

periods for compliance for large and small entities. Some commenters,

particularly service providers to small plans, advocated that the same

rule apply to large and small entities. Only three comments recommended

that a different period for transmittal be provided for large and small

entities. Other comments received requested special consideration for

COBRA payments or Simplified Employee Pensions (SEPs) (available only

to employers with fewer than 26 employees). A few commenters suggested

that a bonding or disclosure option be included as an alternate form of

compliance.

The Department believes that most of the comments expressing

concern about increased administrative costs were in response to the

time frames provided in the NPRM for transmittal of withheld

contributions to the plan. Commenters generally indicated that

additional time was needed for transactions and reconciliations of

accounts. Most small entities found that a fifteen day maximum period

for transmittal of contributions would address their concerns. The

provisions setting the maximum period at 15 business days address the

concerns of those plans that requested additional time for compliance

(including SEPs). Based on the comments and testimony received, the

Department decided not to determine the maximum period based on the

size of the plan (as was proposed), but did change the maximum period

based on the type of plan, i.e., the outer limit for welfare benefit

plans was not changed. Provisions permitting an extension of time to

comply with the regulation were included for entities that would, on

occasion, have difficulty meeting the maximum time period of the

regulation, and for those entities that would have difficulty revising

their benefits systems prior to the effective date of the regulation.

Based on the comments received, including many from small employers

and the businesses that provide payroll and plan administration

services to them, it was determined that there should be a single outer

limit, rather than a tiered regulation providing less rigid

alternatives for small plans. However, to the extent that the

provisions for extensions of time respond to small plan concerns, those

procedures may be considered an alternative form of compliance.

(3) Of the estimated 283,000 pension plans that will receive

participant contributions subject to the regulation (in 1997), an

estimated 245,800 are small plans (plans with less than 100

participants). Based on Form 5500 filings and comments received on the

proposed regulation, only six percent (14,748) will not be in

compliance with the revised regulation, and will therefore have to

change their practices to comply with the new standard. Testimony and

comments also indicate that a high percentage of small plans already

act in compliance with the revised standard. No small governmental

jurisdictions will be affected.

(4) In response to specific requests from employers, including

small employers, the Department is establishing procedures for

extension of the maximum time period for transmittal of contributions.

The disclosure and bonding provisions in the procedure provide an

alternative to plans that find compliance with the maximum period for

pension plans to be burdensome. The projected reporting, recordkeeping

and other compliance requirements of these procedures are described

below. The professional skills necessary for meeting these requirements

are those expected to be available to small plans in their ordinary

course of business.

(5) To the extent that small plan concerns have not been met by

setting the maximum period at 15 business days, several alternatives

which could minimize the impact on small entities have been identified,

and have been included in this final regulation. These alternatives

include a procedure allowing for a postponed application of the new

maximum period for pension plans, and a procedure allowing for an

occasional longer maximum period for transmittal of contributions, with

heightened disclosure and bonding requirements. In order to achieve the

Department's policy objectives, these alternative procedures require

significant safeguards for the security of participants' contributions.

It would be inappropriate to create an alternative with lower

compliance criteria, or an exemption under the proposed regulation, for

small plans because those are the entities which pose a higher degree

of risk of loss due to the delay in depositing participant

contributions into trust. The need for improved compliance by small

plans is demonstrated by the Department's findings, through its

employee contribution investigations, that of closed 401(k) plan cases

with monetary recovery, 75% of these cases involved plans with fewer

than 100 participants.

It should be noted that the Department's proposed regulation

created three tiers of compliance, based on the size of payroll.

However, the overwhelming majority of the comments, including those

from representatives of small plans,

[[Page 41232]]

specifically opposed that approach, asking that a single compliance

schedule remain in effect. Moreover, from the comments received, it

appears that creating a less stringent outside limit exclusively for

small plans might prove more costly because outside service providers

would then have to maintain two sets of software and protocols,

reducing economies of scale. The additional costs would be passed on to

their clients, including small plans.

In addition, many of the reasons set forth in the comments for

having alternative forms of compliance are based on the proposed

regulation, which had significantly more rigid time frames for

compliance. Because the requirements of the final regulation were

drafted in response to those comments, it is the Department's belief

that most of the concerns of small businesses have been addressed in a

manner favorable to them.

This modification of the existing plan asset regulation does not

eliminate protections already provided by the rule, but simply reduces

the outside limit on the existing rule to enhance compliance in light

of improved technology, thereby further improving employee protections.

The Department believes that it has minimized the economic impact

of the revised regulation on small entities in accordance with the

Regulatory Flexibility Act, while accomplishing the objectives of

ERISA.

Paperwork Reduction Act

The Department of Labor, as part of its continuing effort to reduce

paperwork and respondent burden conducts a preclearance consultation

program to provide the general public and Federal agencies with an

opportunity to comment on proposed and/or continuing collections of

information in accordance with the Paperwork Reduction Act of 1995 (PRA

95) (44 U.S.C. 3506(c)(2)(A)). This program helps to ensure that

requested data can be provided in the desired format, reporting burden

(time and financial resources) is minimized, collection instruments are

clearly understood, and the impact of collection requirements on

respondents can be properly assessed. Currently, the Pension and

Welfare Benefits Administration is soliciting comments concerning the

proposed new collection of the Notice of Extension of Time for

Compliance with 29 C.F.R. 2510.3-102.

Written comments must be submitted on or before October 7, 1996.

The Department of Labor is particularly interested in comments which:

evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including whether the information will have practical utility;

evaluate the accuracy of the agency's estimate of the

burden of the proposed collection of information, including the

validity of the methodology and assumptions used;

enhance the quality, utility, and clarity of the

information to be collected; and

minimize the burden of the collection of information on

those who are to respond, including through the use of appropriate

automated, electronic, mechanical, or other technological collection

techniques or other forms of information technology, e.g., permitting

electronic submissions of responses.

Address comments to Mr. Gerald B. Lindrew, U.S. Department of

Labor, PWBA/OPLA, Room N-5647, 200 Constitution Avenue, N.W.,

Washington, DC 20210, telephone 202-219-4782 (this is not a toll-free

number).

I. Background

In response to comments received regarding the revised regulation

below, it was deemed appropriate to offer an optional procedure for

those plans that would incur difficulty or undue expense in complying

with the deadlines of the regulation. This notice-and-bonding procedure

serves as an alternate form of compliance while protecting the security

of the participant contributions to pension plans and providing the

Department with adequate notice of the plans' actions.

II. Current Actions

The collection has two components: the first provides a 90 day

extension of time for plans that cannot comply with the revised

regulation prior to the effective date of the regulation. This

effectively gives those plans 270 days to comply. The second component

extends the maximum time period under paragraph (b) by ten business

days.

In order to comply with one of these options, notice must be

provided to the participants of the plan, a performance bond or

irrevocable letter of credit at least equal to the amount of

participant contributions at risk must be secured, and the Department

must be given a copy of the notice and certification that the notice

was sent and the bond was secured.

Based on past experience, the staff believes that none of the

materials required to be submitted under the procedure for postponement

of application of the maximum period for pension plans will be prepared

by the respondents; rather, the respondents are expected to contract

with service providers such as attorneys, accountants, and third-party

administrators to prepare the materials. Therefore, the Department has

inserted one hour as a placeholder for the estimated burden, in light

of the current requirements that time spent by service providers not be

included in the hourly burden estimate, but rather as a cost. The

annual cost of using service providers for this collection of

information is estimated to be $249,000 in the first year only. In

contrast, because the Department believes that those respondents who

seek an extension of the maximum period are likely to seek such

extensions more than once and therefore are more likely to use their

own personnel, the Department has estimated the burden based wholly on

use of in-house personnel.

Type of Review: New.

Agency: U.S. Department of Labor, Pension and Welfare Benefits

Administration.

Title: Notice of Extension of Time for Compliance with 29 C.F.R.

2510.3-102.

Affected Public: Individuals or households; Business or other for-

profit; Not-for-profit institutions; Farms.

Burden:

--------------------------------------------------------------------------------------------------------------------------------------------------------

Total Total

Cite/reference respondents Frequency responses Average time per response Burden

--------------------------------------------------------------------------------------------------------------------------------------------------------

Extension of Effective Date......... 166 Occasionally.................... 166 ............................ 1 hour.

Extension of Maximum Time........... 166 Occasionally.................... 166 6 hours..................... 996 hours.

Totals........................ ........... ................................ 332 ............................ 997

--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 41233]]

Estimated Total Burden Cost:

Applicability Postponement: $249,000 (first year only).

Extension of Maximum Time: $124,000.

Total: $373,000.

Comments submitted in response to this notice will be summarized

and/or included in the request for Office of Management and Budget

approval of the information collection request; they will also become a

matter of public record.

Unfunded Mandates Reform Act

For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.

104-4), as well as Executive Order 12875, this rule does not include

any Federal mandate that may result in increased expenditures by State,

local or tribal governments, and does not impose an annual burden

exceeding $100 million on the private sector.

Statutory Authority

The final regulation is adopted pursuant to the authority contained

in section 505 of ERISA (Pub. L. 93-406, 88 Stat. 894; 29 U.S.C. 1135)

and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,

October 17, 1978), effective December 31, 1978 (44 FR 1065, January 3,

1979), 3 CFR 1978 Comp. 332, and under Secretary of Labor's Order No.

1-87, 52 FR 13139 (Apr. 21, 1987).

List of Subjects in 29 CFR Part 2510

Employee benefit plans, Employee Retirement Income Security Act,

Pensions, Plan assets.

In view of the foregoing, Part 2510 of Chapter XXV of Title 29 of

the Code of Federal Regulations is amended as set forth below:

PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, AND

G OF THIS CHAPTER

1. The authority citation for part 2510 continues to read as

follows:

Authority: Secs. 3(2), 111(c), 505, Pub. L. 93-406, 88 Stat.

852, 894, (29 U.S.C. 1002(2), 1031, 1135) Secretary of Labor's Order

No. 27-74, 1-86, 1-87, and Labor-Management Services Administration

Order No. 2-9.

Section 2510.3-101 is also issued under sec. 102 of

Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978),

effective December 31, 1978 (44 FR 1065, January 3, 1978); 3 CFR

1978 Comp. 332, and sec. 11018(d) of Pub. L. 99-272, 100 Stat. 82.

Section 2510.3-102 is also issued under sec. 102 of

Reorganization Plan No. 4 of 1978 (43 FR 477133, October 17, 1978),

effective December 31, 1978 (44 FR 1065, January 3, 1978); 3 CFR

1978 Comp. 332.

2. Section 2510.3-102 is revised to read as follows:

Sec. 2510.3-102 Definition of ``plan assets''--participant

contributions.

(a) General rule. For purposes of subtitle A and parts 1 and 4 of

subtitle B of title I of ERISA and section 4975 of the Internal Revenue

Code only (but without any implication for and may not be relied upon

to bar criminal prosecutions under 18 U.S.C. 664), the assets of the

plan include amounts (other than union dues) that a participant or

beneficiary pays to an employer, or amounts that a participant has

withheld from his wages by an employer, for contribution to the plan as

of the earliest date on which such contributions can reasonably be

segregated from the employer's general assets.

(b) Maximum time period for pension benefit plans. With respect to

an employee pension benefit plan as defined in section 3(2) of ERISA,

in no event shall the date determined pursuant to paragraph (a) of this

section occur later than the 15th business day of the month following

the month in which the participant contribution amounts are received by

the employer (in the case of amounts that a participant or beneficiary

pays to an employer) or the 15th business day of the month following

the month in which such amounts would otherwise have been payable to

the participant in cash (in the case of amounts withheld by an employer

from a participant's wages).

(c) Maximum time period for welfare benefit plans. With respect to

an employee welfare benefit plan as defined in section 3(1) of ERISA,

in no event shall the date determined pursuant to paragraph (a) of this

section occur later than 90 days from the date on which the participant

contribution amounts are received by the employer (in the case of

amounts that a participant or beneficiary pays to an employer) or the

date on which such amounts would otherwise have been payable to the

participant in cash (in the case of amounts withheld by an employer

from a participant's wages).

(d) Extension of maximum time period for pension plans. (1) With

respect to participant contributions received or withheld by the

employer in a single month, the maximum time period provided under

paragraph (b) of this section shall be extended for an additional 10

business days for an employer who--

(i) Provides a true and accurate written notice, distributed in a

manner reasonably designed to reach all the plan participants within 5

business days after the end of such extension period, stating--

(A) That the employer elected to take such extension for that

month;

(B) That the affected contributions have been transmitted to the

plan; and

(C) With particularity, the reasons why the employer cannot

reasonably segregate the participant contributions within the time

period described in paragraph (b) of this section;

(ii) Prior to such extension period, obtains a performance bond or

irrevocable letter of credit in favor of the plan and in an amount of

not less than the total amount of participant contributions received or

withheld by the employer in the previous month; and

(iii) Within 5 business days after the end of such extension

period, provides a copy of the notice required under paragraph

(d)(1)(i) of this section to the Secretary, along with a certification

that such notice was provided to the participants and that the bond or

letter of credit required under paragraph (d)(1)(ii) of this section

was obtained.

(2) The performance bond or irrevocable letter of credit required

in paragraph (d)(1)(ii) of this section shall be guaranteed by a bank

or similar institution that is supervised by the Federal government or

a State government and shall remain in effect for 3 months after the

month in which the extension expires.

(3)(i) An employer may not elect an extension under this paragraph

(d) more than twice in any plan year unless the employer pays to the

plan an amount representing interest on the participant contributions

that were subject to all the extensions within such plan year.

(ii) The amount representing interest in paragraph (d)(3)(i) of

this section shall be the greater of--

(A) The amount that otherwise would have been earned on the

participant contributions from the date on which such contributions

were paid to, or withheld by, the employer until such money is

transmitted to the plan had such contributions been invested during

such period in the investment alternative available under plan which

had the highest rate of return; or

(B) Interest at a rate equal to the underpayment rate defined in

section 6621(a)(2) of the Internal Revenue Code from the date on which

such contributions were paid to, or withheld by, the employer until

such money is fully restored to the plan.

(e) Definition. For purposes of this section, the term business day

means any day other than a Saturday, Sunday or any day designated as a

holiday by the Federal Government.

[[Page 41234]]

(f) Examples. The requirements of this section are illustrated by

the following examples:

(1) Employer W is a small company with a small number of employees

at a single payroll location. W maintains a plan under section 401(k)

of the Code in which all of its employees participate. W's practice is

to issue a single check to a trust that is maintained under the plan in

the amount of the total withheld employee contributions within two

business days of the date on which the employees are paid. In view of

the relatively small number of employees and the fact that they are

paid from a single location, W could reasonably be expected to transmit

participant contributions to the trust within two days after the

employee's wages are paid. Therefore, the assets of W's 401(k) plan

include the participant contributions attributable to such pay periods

as of the date two business days from the date the employee's wages are

paid.

(2) Employer X is a large national corporation which sponsors a

section 401(k) plan. X has several payroll centers and uses an outside

payroll processing service to pay employee wages and process

deductions. Each payroll center has a different pay period. Each center

maintains separate accounts on its books for purposes of accounting for

that center's payroll deductions and provides the outside payroll

processor the data necessary to prepare employee paychecks and process

deductions. The payroll processing service has adopted a procedure

under which it issues the employees' paychecks when due and deducts all

payroll taxes and elective employee deductions. It deposits withheld

income and employment payroll taxes within the time frame specified by

26 CFR 31.6302-1 and forwards a computer data tape representing the

total payroll deductions for each employee, for a month's worth of pay

periods, to a centralized location in X, within 4 days after the end of

the month, where the data tape is checked for accuracy. A single check

representing the aggregate participant contributions for the month is

then issued to the plan by the employer. X has determined that this

procedure, which takes up to 10 business days to complete, permits

segregation of participant contributions at the earliest practicable

time and avoids mistakes in the allocation of contribution amounts for

each participant. Therefore, the assets of X's 401(k) plan would

include the participant contributions no later than 10 business days

after the end of the month.

(3) Assume the same facts as in paragraph (f)(2) of this section,

except that X takes 30 days after receipt of the data tape to issue a

check to the plan representing the aggregate participant contributions

for the prior month. X believes that this procedure permits segregation

of participant contributions at the earliest practicable time and

avoids mistakes in the allocation of contribution amounts for each

participant. Under paragraphs (a) and (b) of this section, the assets

of the plan include the participant contributions as soon as X could

reasonably be expected to segregate the contributions from its general

assets, but in no event later than the 15th business day of the month

following the month that a participant or beneficiary pays to an

employer, or has withheld from his wages by an employer, money for

contribution to the plan. The participant contributions become plan

assets no later than that date.

(4) Employer Y is a medium-sized company which maintains a self-

insured contributory group health plan. Several former employees have

elected, pursuant to the provisions of ERISA section 602, 29 U.S.C.

1162, to pay Y for continuation of their coverage under the plan. These

checks arrive at various times during the month and are deposited in

the employer's general account at bank Z. Under paragraphs (a) and (b)

of this section, the assets of the plan include the former employees'

payments as soon after the checks have cleared the bank as Y could

reasonably be expected to segregate the payments from its general

assets, but in no event later than the 90 days after a participant or

beneficiary, including a former employee, pays to an employer, or has

withheld from his wages by an employer, money for contribution to the

plan.

(g) Effective date. This section is effective February 3, 1997.

(h) Applicability date for collectively-bargained plans. (1)

Paragraph (b) of this section applies to collectively bargained plans

no sooner than the later of--

(i) February 3, 1997; or

(ii) The first day of the plan year that begins after the

expiration of the last to expire of any applicable bargaining agreement

in effect on August 7, 1996.

(2) Until paragraph (b) of this section applies to a collectively

bargained plan, paragraph (c) of this section shall apply to such plan

as if such plan were an employee welfare benefit plan.

(i) Optional postponement of applicability. (1) The application of

paragraph (b) of this section shall be postponed for up to an

additional 90 days beyond the effective date described in paragraph (g)

of this section for an employer who, prior to February 3, 1997--

(i) Provides a true and accurate written notice, distributed in a

manner designed to reach all the plan participants before the end of

February 3, 1997, stating--

(A) That the employer elected to postpone such applicability;

(B) The date that the postponement will expire; and

(C) With particularity the reasons why the employer cannot

reasonably segregate the participant contributions within the time

period described in paragraph (b) of this section, by February 3, 1997;

(ii) Obtains a performance bond or irrevocable letter of credit in

favor of the plan and in an amount of not less than the total amount of

participant contributions received or withheld by the employer in the

previous 3 months;

(iii) Provides a copy of the notice required under paragraph

(i)(1)(i) of this section to the Secretary, along with a certification

that such notice was provided to the participants and that the bond or

letter of credit required under paragraph (i)(1)(ii) of this section

was obtained; and

(iv) For each month during which such postponement is in effect,

provides a true and accurate written notice to the plan participants

indicating the date on which the participant contributions received or

withheld by the employer during such month were transmitted to the

plan.

(2) The notice required in paragraph (i)(1)(iv) of this section

shall be distributed in a manner reasonably designed to reach all the

plan participants within 10 days after transmission of the affected

participant contributions.

(3) The bond or letter of credit required under paragraph

(i)(1)(ii) shall be guaranteed by a bank or similar institution that is

supervised by the Federal government or a State government and shall

remain in effect for 3 months after the month in which the postponement

expires.

(4) During the period of any postponement of applicability with

respect to a plan under this paragraph (i), paragraph (c) of this

section shall apply to such plan as if such plan were an employee

welfare benefit plan.

[[Page 41235]]

Signed at Washington, DC, this 30th day of July 1996.

Olena Berg,

Assistant Secretary for Pension and Welfare Benefits, Department of

Labor.

[FR Doc. 96-19791 Filed 8-6-96; 8:45 am]

BILLING CODE 4510-29-P